Two decentralized reserve procurance methods and the comparison

Abstract

In power markets, ancillary service is usually centrally handled. The system operator will determine the required reserve capacity and purchase it from the reserve suppliers. And the corresponding cost is allocated to the consumers. This approach lacks customers' choices and may lead to inefficiency. In the market environment, the decentralized decision-making approach should be recommended so as to use the invisible hand of markets to achieve market equilibrium and efficiency. In this paper, we suggest two approaches to procure operating reserve. They are contract-based approach and pool-based approach. In the two approaches, a theory of insurance policy is introduced to make optimal decentralized decision possible, improving the dispatch of reserve capacity and reducing the risk of loss of power supplying to consumers. A numerical example is utilized to illustrate the effectiveness of the suggested approaches. It is proven that under certain conditions the pool-based approach is more cost-effective than the contract-based approach and should be adopted in the deregulated electricity markets.